A sole proprietorship is a business that is owned and run by just one person. The most important thing to understand is that, in the eyes of the law, you and your business are the same thing. There is no legal separation between you, the owner, and the business itself.
Imagine you have a wallet. You might have a section for your personal money and another section for your business money. To you, they might seem separate. But to the law, it’s all just one wallet. It all belongs to you.
Texas courts have been very clear about this. They have said many times that a sole proprietorship does not have its own separate identity. The business is just you operating under a business name. This means:
- All the money and property of the business belong to you directly.
- All the debts and problems of the business belong to you directly.
This is different from other business entities, like a corporation or a Limited Liability Company (LLC), which are legally separate from their owners. For a sole proprietor, there is no shield between your business life and your personal life.
What Are the Characteristics of a Sole Proprietorship in Texas?
Understanding the main features of a sole proprietorship can help you see if it’s the right fit for you. Here are the key things to know.
Easy to Start
This is the biggest draw for many people. To start a sole proprietorship in Texas, you just… start working. You don’t have to file any special forms with the state to create your business. If you decide today to start selling handmade jewelry online, you have created a sole proprietorship.
However, you might still need to get local or state permits or licenses, depending on your type of business. For example, a home baker might need a food handler’s permit from their city.
You Are in Full Control
As the sole owner, you are the boss. You make all the decisions. You don’t have to check with a business partner or a board of directors. You decide what services to offer, what prices to charge, and what hours to work. All the profits the business makes are yours to keep.
No Legal Separation
This is the most serious feature to understand. Because the law sees you and your business as one and the same, there is a direct link between your business and your personal life. This leads to something called “unlimited personal liability.”
Unlimited Personal Liability
This sounds a bit scary, and it can be. It means that you are personally responsible for all of your business’s debts. For example, if your business cannot pay its bills, the people you owe money to can come after your personal things, like your car or bank account. This is the most serious risk of this business type, and many Texas lawyers advise new owners to carefully consider business structures that offer more personal protection.
Let’s say you are a freelance graphic designer. You buy a new $3,000 computer for your business using credit. If your business doesn’t make enough money and you can’t pay that bill, the credit card company can come after you personally. They could sue you and take money from your personal bank account or even go after other property you own, like your car.
This is also true if your business gets sued. For example, if you run a lawn care service and you accidentally damage a client’s property, they can sue your business. Because you are the business, they are suing you personally. Your personal savings, home, and other assets could be at risk to pay for that damage.
Business Name
As a sole proprietor, you can do business under your own legal name (e.g., “Jane Smith”). You don’t have to do anything special for this.
If you want to use a different name for your business (e.g., “Jane’s Creative Designs”), you will likely need to file an “Assumed Name Certificate.” This is often called a “DBA,” which stands for “Doing Business As.” You usually file this with the county clerk where your business is located. This lets the public know who is behind the business name.
What Are the Pros and Cons of Having a Sole Proprietorship in Texas?
Like any business choice, there are good sides and bad sides. Thinking about the sole proprietorship pros and cons can help you decide if this structure works for you or if you should talk to someone about other options.
The Good Things (Pros)
- Simple and Inexpensive Setup: You don’t have to pay fees or file complicated paperwork with the state to create your business. This makes it the fastest and cheapest way to get started.
- Total Control: You are in charge of everything. You get to make your vision a reality without needing anyone else’s approval.
- Easy Tax Reporting: You don’t file a separate tax return for the business. You just report your business income and losses on your personal tax return. This makes paperwork much simpler.
- You Keep All the Money: Every dollar of profit your business makes belongs to you.
The Not-So-Good Things (Cons)
- Unlimited Personal Liability: This is the biggest risk. If your business has debts or gets sued, your personal money and property (like your house or car) are at risk. There is no protection.
- Harder to Get Money: Banks and investors are sometimes less willing to give large loans to a sole proprietorship. The business depends entirely on you, which can seem risky to them. You also can’t sell stock to raise money like a corporation can.
- It Can Look Less Professional: Some larger clients may prefer to work with an LLC or a corporation. A sole proprietorship might seem less established to some people.
- Difficult to Sell: You can’t sell the business in one piece. If you want to sell, you have to do a sale of business assets, which means selling the equipment, client lists, and other pieces of the business separately. This process can be complicated, and it is an issue a Texas corporate lawyer can help you plan for.
- Life of the Business is Tied to You: If you stop working, the business basically stops existing. It’s hard to pass a sole proprietorship on to someone else.
Weighing these factors is a personal choice. For many new business owners, having a Texas lawyer consultation can help clarify which path is best for their specific goals and plans for the future.
In Texas, How Is a Sole Proprietorship Taxed?
Taxes are a big part of any business. Luckily, for a sole proprietorship in Texas, the rules are fairly simple.
Pass-Through Taxation
A sole proprietorship uses what’s called “pass-through” taxation. This means the business itself does not pay any income taxes. Instead, the profits and losses from the business “pass through” to you, the owner.
You report all of your business’s financial information on a form called Schedule C, “Profit or Loss from Business,” which you file with your personal federal income tax return, the Form 1040.
No Texas State Income Tax
Here is some great news: Texas does not have a personal state income tax. Since your business income is just treated as your personal income, you will not have to pay any state income tax on the money you make from your business. This is a big advantage for business owners in Texas.
Federal Taxes
You still have to pay federal taxes. This includes:
- Federal Income Tax: This is the regular income tax on the profits your business makes.
- Self-Employment Tax: When you work for an employer, they pay half of your Social Security and Medicare taxes, and you pay the other half. When you are self-employed, you have to pay both halves. This is called the self-employment tax.
Estimated Taxes
Because you don’t have an employer withholding taxes from a paycheck, you are responsible for paying your taxes to the IRS throughout the year. These are called estimated tax payments. Most sole proprietors have to make these payments four times a year (in April, June, September, and January).
Texas Franchise Tax
Texas has a business tax called the franchise tax. But, another piece of good news is that sole proprietorships are not required to pay the Texas franchise tax. This helps keep costs down for small business owners.
Should I Consult a Texas Lawyer About My Business Structure?
Yes, you should consider it. While starting a sole proprietorship is easy, it comes with a major risk: unlimited personal liability. This means your personal assets, like your car or home, could be used to pay for business debts or lawsuits. As your business grows, this risk only gets bigger. A Texas lawyer consultation can help you understand these dangers. Texas lawyers who work with businesses can explain the pros and cons of different business entities and show you how an option like an LLC or corporation could offer the protection you need.
A knowledgeable Texas corporate lawyer can guide you through the process of choosing the best structure to protect your family and your assets. They can help you understand all your options and file the necessary paperwork to set your business up correctly from the start.
You don’t have to figure this all out by yourself. Getting the right advice from someone who understands Texas business law provides peace of mind and can save you from serious trouble later on. Find the right lawyer for you today.
